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Milton Friedman’s Profit Fiction: Part 5

This is the fifth of a six-blog series that simply and in plain language explains the dangerous fallacy of Milton Friedman’s “maximize profit” business ethic. Here, we discuss the second of three egregious consequences of that ethic.

Consequence 2: Too Big, Too Failed

A second consequence of the profit maximization ethic to raise shareholder value is its utter ambiguity regarding time. Profit maximization for shareholder value today is not the same as for next year, much less the next decade, much less the next generation. Shareholders would reap the maximum profit today if a corporation liquidated all its assets, yet most companies see the need to invest in future operations. Lack of clarity on timing is not merely a semantics problem, though; it also reveals short-term thinking and greed. It may also reveal a laziness in thinking and planning because it’s mentally easier, although perhaps more damaging in every other way, to focus on corporate performance for just a fiscal quarter. Moreover, let’s be honest with each other. Is it not likely that over the decades we’ve been lured and trapped into focusing on maximizing shareholder value simply because it’s the simplest metric to measure, track, gauge, and by which to manipulate executive compensation?

Photo Credit | Jon Tyson on Unsplash

Although corporations are legally granted indefinite lifespans, their average actual lifespan is considerably less than that of humans, ranging between twenty and fifty years. Only 25 percent of the original S&P 500 companies (circa 1957)—the largest and presumably most stable corporations in America—survived forty-six years to be studied in 2003. Clearly something in the current system is flawed, and it is not benefiting shareholders any more than other stakeholders. As Jesus observes in Matthew 6:25–34, God’s provision has been feeding birds, clothing fields, and nourishing humans for millennia. Corporations, on the other hand, operating under the current profit maximization ethic, are lucky to provide anything for even fifty years.

The problem of companies’ inability to provide value, much less maximize it, for even a portion of the human lifespan is further highlighted by reviewing the well-known business book Built to Last. The product of six years of research at the Stanford University Graduate School of Business by Jerry Porras and Jim Collins, this is a well-researched study by highly respected business thinkers that has been acclaimed by many business leaders. (We are fans, having trained with the book in our graduate programs and applied it in our professional roles.) Published in 1994, it identified eighteen “truly exceptional,” “enduringly great,” “more than enduring,” “best of the best” companies and a blueprint “for building organizations that will prosper long into the twenty-first century and beyond.”

However, twenty-five years later as of January 1, 2019 - hardly long into the twenty-first century much less beyond, eight of those eighteen companies (Citi, Ford, GE, HP, Merck, Motorola, Nordstrom, Sony) have since underperformed the general stock market (S&P 500 index), while others have shrunk in market capitalization, and at least two (Motorola, Philip Morris) have been forced into major restructurings, divestments, or buyouts. Other companies (Boeing) face real questions about their continued viability. Porras and Collins make a point to say part of the enduring greatness of these companies is “more than profits”—they have an outsized and lasting impact on the world. This factor is hard to measure with precise numbers, but most readers will agree that the impact and cachet of more than a few companies on this list have waned.

Cue the quip attributed to Yogi Berra, “Prediction is hard, especially of the future.” Even among companies rigorously selected specifically on the basis of enduring greatness and being “built to last,” there is an inconsistent ability to deliver on the claim of maximizing shareholder value. A coin toss would have been as effective at identifying companies that could deliver shareholder value above the general market, and at least three out of the eighteen lost shareholder value over a twenty-five year period while the S&P 500 delivered gains of over 500 percent.

Profit maximization for shareholders implies benefit for current shareholders, who seek to maximize profits for themselves. How much thought is given to value for future shareholders? This mentality results in inflating corporate values in the short term and then bailing. The familiar strategy of “pump and dump” springs from this mentality. Again, the 2008 crisis, and its Orwellian designation of “too big to fail” for big companies that quite obviously failed, make all too clear the consequences of this ethic. Profit maximization for current shareholders simply is not sustainable; it leads to inevitable failures and crashes that damage all stakeholders (including shareholders) and jeopardize—or end—the corporation’s very existence. A sound corporate ethic would seek sustainable profitability. The current ethic is simply too shortsighted.

In the next Part 6 we continue our critique of Friedman’s maximize profit ethic by exploring perhaps its most dangerous consequence. We invite you to stay tuned. Meanwhile, we would love to hear your thoughts about the Friedman ethic. Email us to

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